Follow Up

Oracle Pushes Deeper Into the Cloud

Oracle's latest acquisition boosts the software giant. A hedge-fund activist alleges the marketer of vitamins and diet shakes is a pyramid scheme. And a truck maker overcomes Europe's problems to grow in 2012, and likely beyond.

The cloud, of course, is tech-speak for software that is no longer sold directly to enterprise customers, but rather installed in a data center where it can be served up to them.

On Tuesday evening, Oracle reported a good but not blowout fiscal second quarter, with revenue rising just 3.4%, to $9.1 billion, although profits were up 18% from the year-earlier level, to $2.6 billion, or 53 cents a share. The tech giant said that its revenue from new software licenses and subscriptions to cloud software rose 17% in the period, which ended on Nov. 30. About $230 million of its revenue came from the cloud.

CEO Larry Ellison is leading the charge against rivals like Salesforce.com.
David Paul Morris/Bloomberg News

For a large, established player like Oracle to become more like Salesforce is a marathon, not a sprint, however, and will require a lot of building or acquiring.

In fact, the very next day after releasing its results, Oracle announced that it would pay $871 million for Vienna, Va.–based start-up Eloqua, which has 1,200 customers signed on for cloud-based marketing software.

Continued acquisitions of that sort are important, because Oracle's organic growth, estimates Nomura Securities analyst Rick Sherlund, was just 1.7% last quarter.

Equally important for Oracle, whose stock (ORCL) is up 17% since our article ran, to a recent $33.70, is that its hardware business could become less of a burden. It picked up that business in 2009, with the $7.4 billion acquisition of Sun Microsystems.

Hardware sales were down 23% last quarter, but Oracle chief Larry Ellison said they might be merely flat this quarter, when measured year-over-year.

Sherlund and others hail that as a potential turning point.

Oracle just paid out three quarters' worth of dividends in accelerated fashion, which robs the stock of some of the appeal it would have going into next year.

Still, the shares are undemanding, at just under 10 times projected earnings per share of $2.70 this fiscal year, which ends in May, after backing out $7 per share in cash and marketable securities.

If the hardware business does turn into less of a blight next year, the stock could attract investors. With some expansion of the multiple and a move in profits toward $3 a share, Oracles's shares could climb above $40, a gain of almost 20%.

In TV appearances last week and a new Website (factsaboutherbalife.com), Ackman alleged that Herbalife is a pyramid scheme, which is illegal. The Los Angeles-based outfit should be targeted by regulators, said Ackman, but soon enough will run out of new recruits to push its products. His firm estimates that millions of people have lost $3.8 billion in failed attempts to get rich by recruiting still other people to buy and sell Herbalife items.

The company has vigorously denied such charges in the past and said it will hold an analyst meeting during the week of Jan. 7, 2013 to respond to the "distorted, outdated and inaccurate information" from Pershing Square. Herbalife's furious Chief Executive Michael O. Johnson called Ackman's allegations "bogus" and seemed to threaten the money manager—telling CNBC that "the United States will be better when Bill Ackman is gone."

The money manager pledged to make a charitable donation of his profits from the short sale, including a guaranteed donation of $25 million to the Ira W. Sohn children's cancer foundation, which co-sponsored Ackman's unusual Dec. 20 jeremiad. With just a few days left before Pershing Square's year-end performance measurement, the firm's Herbalife position will likely benefit from the stock's 38% drop on the week, to $27.27.

Paccar's Big Engines Just Beginning to Rev

A year ago we advised readers to be patient with
Paccar.
pcar -0.24428684003152087%Paccar Inc.U.S.: NasdaqUSD63.295
-0.155-0.24428684003152087%
/Date(1427829027200-0500)/
Volume (Delayed 15m)
:
769193
P/E Ratio
16.52219321148825Market Cap
22503557025.6546
Dividend Yield
1.390644753476612% Rev. per Employee
815322More quote details and news »pcarinYour ValueYour ChangeShort position
Shares of the world's ninth-biggest maker of medium- and large-size trucks were off 35% because it derived about a third of its revenue from Europe, which was struggling with debt and growth problems. More important, we argued, Paccar was about to benefit from the pent-up demand signaled by an aging North American trucking fleet, which, on average, had been on the road for almost seven years.

As predicted ("Ready to Roll in 2012," Jan. 2), Paccar (ticker: PCAR) has powered its way through. Estimated 2012 earnings come to $3.09 a share on revenue of $16 billion, compared with $2.86 a share on $15.3 billion in revenue in 2011. That performance has driven the shares 20% higher this year, better than the S&P's 15% gain.

The maker of Peterbilt and Kenworth trucks is winning over new adherents. Ross Gilardi, analyst for Bank of America Merrill Lynch, recently recommended the shares as a Buy with a $54 price target, about 20% above last week's levels. Based on Gilardi's estimates, Paccar shares trade at a reasonable 12 times fiscal 2014 earnings of $3.73, up 17% from his $3.20 estimate for 2013.

Expectations for a flatter growth trajectory should string out Paccar's gains. Kenny Vieth, a partner with ACT Research in Columbus, Ind., says the recovery will extend into 2014 in the U.S. and Europe. Paccar also has a new Brazilian manufacturing site coming online next year, which should help push revenues. In the meantime, investors received a 3.5% dividend yield. Not bad company on a long ride.